Audit summary

Safe, secure housing is essential for good health,
employment, education and community wellbeing. Without access to affordable
housing, some people risk homelessness or struggle to meet utility, food and
other basic living costs. Public housing is an important way that government
assists those in housing need.

The Housing and Community Building Division
(the division) of the Department of Human Services (DHS) is responsible
for the management of public housing, which is generally government owned and
managed. At June 2011, there were 65 352 dwellings and 127 357 tenants in
public housing, and 38 244 eligible households on the public housing waiting
list.

Public housing is facing significant challenges.
Against a background of finite government resources, demand has grown due to
reduced housing affordability and demographic changes such as population
ageing, and more and smaller households. Increased targeting of public housing
has changed the tenant profile to those with more complex needs and lower
incomes. Public housing infrastructure is also ageing, requiring significantly
increased maintenance. These challenges highlight the importance of effective
asset management that not only delivers portfolio value but also provides
access to housing that allows people to live, work and thrive.

Providing access to public housing, now and into the
future, requires a sustainable asset base that meets community need. Careful
planning using accurate information, for example, about housing demand, the
current and projected tenant profile, and the asset condition, is a
prerequisite. Long-term direction detailing service outcomes, comprehensive
asset management strategies that consider the full life of assets,
opportunities for innovation, and adequate performance measures to track
progress are also vital.

This audit examined how effectively the division plans
for, and maintains public housing assets, to support current and future access
for eligible tenants.

Conclusions

The situation for public housing is critical. The
current operating model and asset management approach places the long-term
provision of this vital public service at risk. Despite a growing need for
housing support in our community, DHS has not set overarching direction for
public housing or taken a strategic, comprehensive approach to managing this
$17.8 billion property portfolio.

The operating model for public housing, with costs
increasingly exceeding revenues, is unsustainable. By using short-term
strategies, such as reducing acquisitions and preventative maintenance, the
division is deferring the problem. However, this cannot continue indefinitely.
The seriousness of the situation is expressed in a 2011 report, for the Minister
for Housing, that forecasts cash running out in 2012–13 and the division
in deficit.

It is unclear why the division has not introduced
longer-term strategies to address this acute situation given that it has
developed over at least a decade. Since at least 2006, other departments,
including the Department of Treasury and Finance (DTF) and the Department of
Premier and Cabinet, have also been aware of the deteriorating state of public
housing, yet this has not spurred action.

There are no clear long-term objectives for public
housing. Long-term objectives are important to guide management of an asset
base with a long life span that requires substantial lead times for
redevelopment or renewal. Now that public housing is nearing a crisis, it will
be all the more challenging to address.

The division's lack of comprehensive asset management
has meant missed opportunities to more strategically position the public
housing portfolio. The division has an estimated 10 000, or 14 per cent of
properties nearing obsolescence and a significant mismatch of properties to
tenant need. Yet, there is no asset management strategy in place. Past
strategies fall well short of DTF and other established asset management
guidelines, and the division lacks basic information, such as accurate property
condition data, to inform decisions. These failings expose a serious deficit in
asset management skills within DHS, which must be addressed. Effective asset
management is fundamental to supporting current and future public housing provision.

Work is underway to develop a new housing framework
for the future direction of public housing. While developing a sustainable
operating model is a central goal of the framework, at the time of the audit
the division had yet to fully assess the financial impact of policy options
under consideration. Accordingly there is no evidence at this point that the
framework will address sustainability. The current operating approach is not
working, and cost and demand pressures are unlikely to abate, so change is
necessary. New directions must explore innovative options for providing public
housing and should consider the future role of the division, so that access to
public housing can be better managed and sustainable into the future.

Findings

An unsustainable operating model

Public housing rents are set at no more than 25 per
cent of tenant income. Prioritisation of public housing to those in greatest
need has increased the proportion of unemployed tenants who are receiving
benefits. In turn, this decreases the division's rental revenues. At the same
time, the division's operating costs have substantially increased. Despite
this, the division has never reviewed its efficiency.

In 2011, the Minister for Housing commissioned a
review of the financial position of public housing. The review found that 2011
operating costs exceeded rental revenue by 42 per cent, up from 30 per
cent in 2002. The review forecasts the division's deficit to more than double
from $56.4 million in 2011 to $115.1 million in 2015 and that all cash
reserves will be exhausted in 2012–13. To date, the division has used
short-term strategies to address the financial situation. These strategies
include reducing acquisitions, deferring preventative maintenance, and funding
deficits by utilising cash meant for long-term programs. This only compounds
the issue, particularly the growing maintenance liability. The public housing
portfolio is now in a seriously deteriorating condition with the division
estimating that 10 000 properties, 14 per cent of the total, will reach
obsolescence over the next four years.

Planning for the future

Apart from increased prioritisation of public housing
to people in greatest need, there has been little change in public housing
policy regarding the operating model over the past decade. Pursuing growth of
community housing and initiatives under national partnership agreements through
time-limited Commonwealth funding has been the main focus.

Over this period, the division has not articulated
long-term objectives for the public housing portfolio, or undertaken long-term
planning. This is problematic as changes to these fixed assets require
substantial lead time. Stock turnover is slow, given the long life span of
houses, and new builds and redevelopments take years from concept to
completion. Challenges which emerged a decade ago, such as the increase in
demand for one-bedroom properties and the increasing operating deficit,
continue not to be addressed. The division has not adequately explored
alternative models to manage public housing sustainably or reassessed its own
role in the provision of public housing.

The new housing framework is under development and due
to go to public consultation in the first half of 2012. However, financial
modelling of proposed policy options is not complete, and so it is not yet
clear how the framework will address the unsustainable operating model.

Poor asset management

Such a large property portfolio warrants comprehensive
asset management, yet there is no current asset management strategy. The
division's past asset management strategies lacked basic elements such as
annual updating, consideration of the full life cycle of assets, and comparison
of current to desired stock, in terms of size or location. The last asset
management strategy, which expired in 2011, neither aligned with overarching
DHS strategic plans and objectives, nor articulated any desired future for
public housing. There was no gap analysis or any articulation of how planned
activities would meet future need. The strategy also did not analyse options
for portfolio management or identify where or how value could be extracted from
the property portfolio.

Past asset management strategies were not reviewed and
updated regularly. The division uses no performance measures for its asset
management, and as such, its performance in this area has not been evaluated.

Poorly informed decision-making

Effective asset management decisions require a
reliable evidence base. The division collects information on tenant
characteristics and preferences from waitlist and census data, and affordable
housing supply information that it applies to individual asset decisions.
However, the division does not have accurate, up-to-date property condition
data, does minimal forecasting of future need, and obtains limited input from
important stakeholders such as its regional offices and tenants. It does not
apply this information systematically, for example to a broader asset strategy
or future plan.

While the division can demonstrate progress in the
better matching of housing stock to tenant needs, there is still a substantial
mismatch between public housing property types and tenant requirements. The
portfolio contains too many large properties, while current demand is for
single bedroom accommodation. Earlier system-level forecasting of future need,
linked to asset strategies, would have helped mitigate this. Better property
condition data would also have highlighted maintenance issues earlier.

The rationale for the division's investment decisions
is also unclear, with no clearly documented and communicated decision-making
criteria. This is particularly difficult for regional offices that do not
understand, and therefore can only provide limited input into, central office
decision-making.

Recommendations

The Department of Human Services should:

develop and apply options to overcome the unsustainable
operating model

Submissions and comments received

In addition to
progressive engagement during the course of the audit, in accordance with
section 16(3) of the Audit Act 1994 a copy of this report was provided
to the Department of Human Services with a request for submissions or comments.

Agency views have been considered in reaching our
audit conclusions and are represented to the extent relevant and warranted in
preparing this report. Their full section 16(3) submissions and comments
however, are included in Appendix A.

1. Background

1.1 Introduction

Safe, secure housing is essential for good health,
employment, education and community wellbeing. Without access to affordable
housing, some people face homelessness or struggle to meet utility, food and
other basic living costs.

Victoria is experiencing a shortage of available
affordable housing as population growth exceeds housing supply, intensifying
demand and increasing costs in the private rental market. In turn, this has
driven demand for government-supported housing. Figure 1A illustrates the range
of social housing programs, which includes public and community housing.

Figure 1A
State government supported housing options

Source: Victorian Auditor-General’s Office.

This audit focuses on public housing. Public housing
is government owned or leased, and managed. It provides affordable rental
accommodation, at less than market rates, with rent no more than 25 per cent of
the tenant’s income. It also offers secure tenure. In contrast, community
housing is partly funded by the government and managed by not-for-profit
organisations. These rents are determined as a percentage of market rates and
may be more than 25 per cent of the tenant’s income.

Community housing was the focus of the 2010 VAGO
performance audit Access to Social Housing. Crisis housing and
homelessness responses will be the focus of a future VAGO performance audit
currently planned for 2012–13.

1.2 Public
housing in Victoria

Public housing is the main source of social housing in
Victoria. At June 2011, there were 82 927 social housing dwellings in Victoria,
65 352 (78.8 per cent) of which were public housing, owned and managed by the
Department of Human Services (DHS). Figure 1B shows the total number of public
housing dwellings by type at 30 June 2011.

Figure 1B
Department of Human Services owned and managed public housing
by dwelling type and region

Legislative framework

The Housing Act 1983 (the Act) establishes
the role and responsibilities of the Director of Housing, the largest landlord
in Victoria, and a role currently filled by the Executive Director of the
Housing and Community Building Division (the division) of DHS. The first
objective of the Act is to ensure that every person in Victoria has adequate
and appropriate housing at a price within his or her means. Other objectives
include:

the provision of well-maintained public housing of suitable quality
and location

the promotion of cost-effectiveness in the provision of housing

the integration of public and private housing

the promotion of security and variety of tenure

the participation of tenants and other community groups in the
management of public housing.

The Act gives powers to the Director of Housing to
purchase, develop, lease and sell property.

Public housing policy

Previous governments released two policies relevant to
public housing. In 2003, the Strategy for growth in housing for low income
Victorians aimed to increase the provision of affordable housing options
through partnerships with community housing associations. In 2010, the Integrated
housing strategy was, among other things, designed to provide better public
housing through an asset regeneration plan for inner‑city public housing
estates, and the construction of 800 new public housing units. The government
is developing a housing framework due for release in 2012.

Funding for public housing

Funding for the division in 2011–12 is
$401.9 million, with $168.8 million for social housing activity. This
funding covers community and public housing and comes from three sources:

state and Commonwealth funds under the National Affordable
Housing Agreement and supporting agreements such as Social Housing and
Nation Building partnership agreements

additional state funds

internally generated funds from owning and operating rental
properties, such as rental income and proceeds from asset sales.

DHS central office allocates funds to the
regional offices as described in each financial year’s Housing Policy and
Funding Plan.

1.3 Role
of the Department of Human Services

Within DHS, the division is responsible for public
housing, including the management of applications, allocations, asset
management and procurement, and tenancy management. The role of the division is
to:

provide more and better affordable rental housing

upgrade and improve public and social housing to be environmentally
sustainable and better integrated with the whole community

support those most in need with more training and employment
opportunities, provide crisis accommodation and tackle the causes of
homelessness in Victoria.

Asset management

Maintaining, improving and growing public housing
assets is an essential function of the division. Good asset management means
applying plans that deliver public housing over the lives of these assets in a
way that is cost-effective.

In 1994, the Department of Treasury and Finance set
down principles that guide public sector asset management, and they remain true
today. They include:

following an integrated approach—aligning
asset management requirements and service outcomes to overarching plans and
objectives

focusing on service delivery—all
planning, decisions and reporting should focus on the type and quality of
services the community needs

making evidence-based asset decisions—by
relying on rigorous information about the costs, benefits and risks of
alternatives across the asset life cycle.

Making these principles operational involves:

setting clear and comprehensive targets for levels of service

forming a long-term plan and annual priorities, showing how agencies
will make best use of assumed levels of funding to achieve these targets

regularly measuring performance and forecasting how current
decisions and agencies' long-term plans are likely to affect levels of service.

1.4 Public
housing challenges

Demand

The demand for public housing has exceeded supply over
the audited period of the past ten years. The cost of living and household
numbers have increased and the availability of affordable housing has
decreased.

The demand for public housing is measured as the
number of households that have applied for public housing and are on the public
housing waiting list. At June 2011, there were 38 244 households on the waiting
list. Once applicants are approved for public housing, they still have to wait
to be housed. In 2009–10, applicants who had received a priority
allocation waited an average of 8.5 months for housing. Non-priority applicants
wait several years.

A changing tenant profile

The tenant profile of public housing has changed substantially.
Many of the larger estates built in the 1960s were intended for working
families on low to moderate incomes, as a transitional measure, before they
moved into the private housing market. Public housing today serves those most
in need, with an increasing proportion of elderly, single and economically and
socially disadvantaged tenants. As a result, public housing has increasingly
been allocated to people with complex needs, including mental health, drug and
alcohol issues, a disability, and people with very low incomes. This shift has
increased the cost of housing requirements and tenancy management and services.
It has also resulted in lower rental returns and turnover of dwellings.

Ageing and inappropriate infrastructure

Forty-two per cent of housing stock is over 30 years
old. Properties of this age generally require more frequent and larger scale
repairs, maintenance and upgrades. Most properties were also built to meet the
needs of families as opposed to an increasingly single and older tenant group.

1.5 Audit
objective, scope and method

The audit objective is to examine how effectively
DHS plans for, and provides access to, public housing by assessing whether:

plans and strategies are in place to support the provision and
maintenance of public housing

plans and strategies are evidence based

plans and strategies are implemented, and performance against
objectives is reviewed and acted on.

The audit examined the central office of the Housing
and Community Building Division, along with two metropolitan and two
rural/regional offices. Public housing tenants were consulted as stakeholders
through interviews and forums.

Part 2 of the report examines outcomes and future
direction for the public housing portfolio and Part 3 looks at DHS’s management
of public housing assets.

The audit was conducted in accordance with the
Australian Auditing and Assurance Standards.

2. The state and future of public housing

At a glance

Background

Public housing is facing major challenges, including
growing demand due to reduced housing affordability, more tenants with
complex needs, ageing infrastructure and high maintenance costs. Meeting
these challenges to provide access to public housing now and into the future
requires decisive direction and a sustainable operating model.

Conclusion

Public housing is operating unsustainably and without direction.
The Department of Human Services’ (DHS) Housing and Community Building
Division (the division) has been slow and short-sighted in responding to a
changing operating environment. Despite DHS and the departments of Treasury
and Finance and Premier and Cabinet awareness of the problem for at least six years,
sustainable solutions are yet to materialise. New directions now being
developed through the housing framework must innovate and unlock portfolio
value to assure viable public housing in the future.

Findings

Public housing’s operating model is unsustainable. Costs are
outstripping rental income and the division is forecast to be in deficit in
2012–13.

The division’s short-term strategies to address the financial
position have deferred and compounded the problem.

The asset base is deteriorating, with an estimated 10 000
properties reaching obsolescence.

The division has not articulated long-term objectives or plans
for public housing.

A housing framework is being developed but it is not yet clear
how it will support public housing sustainability.

Recommendations

The Department of Human Services should:

develop and apply options to overcome the unsustainable
operating model

assess its operational efficiency and role in public housing

develop a long-term plan for public housing with clear
objectives.

2.1 Introduction

Public housing is facing major challenges, including
growing demand driven by reduced housing affordability, an increasing
percentage of tenants with complex needs, ageing infrastructure and high
maintenance costs. These challenges require a long‑term vision and clear
direction, and the application of a secure and sustainable operating model, to
enable those in need to access public housing, now and into the future.

2.2 Conclusion

Public housing is operating unsustainably and without
strategic direction to address this. This puts the long-term provision of this
vital public service at risk and, in the short-term, the Housing and Community
Building Division (the division) of the Department of Human Services (DHS) is
forecast to run out of cash in 2012–13. The unsustainable operating model
is the result of reduced revenue, because of a greater percentage of very low‑income
tenants, and increased operating costs.

The current situation has been developing over an
extended period. DHS and other government departments, including the Department
of Treasury and Finance (DTF) and the Department of Premier and Cabinet (DPC),
have been aware of the problem for at least six years. Despite this, no remedies
have been put in place.

The division has addressed its financial position
through short-term measures such as deferring acquisitions and preventative
maintenance, which only compound its significant maintenance liability. The
division now estimates that 10 000, or 14 per cent, of its properties are near
obsolescence. The division has also never reviewed its efficiency, despite
significantly increased administrative costs.

The division has not articulated long-term objectives
or plans for public housing. Housing assets have a long life span, and so
change requires substantial lead time. The division’s lack of forward thinking
makes acute problems, such as the mismatch between dwelling types in the
portfolio and tenant need, more challenging to address. The division has not
adequately explored alternative models to manage public housing sustainably, or
assessed what future role it should play in providing public housing.

At March 2012, the division had not yet completed work
to evaluate the financial effect of policy options being considered under the
new housing framework, and so, at this stage, it is unclear how it will address
the underlying structural deficit. New direction in public housing must
innovate to provide ongoing access to public housing.

2.3 The public housing operating model

2.3.1 Financial non-viability

The division has not operated in a focused and
outcome-oriented manner to sustainably manage public housing. The public
housing operational model is not financially viable, as it has a structural
deficit. The division’s costs exceed revenue, as rental income is increasingly
less than the outgoing costs for services such as maintenance, rates, security
and insurance.

Revenue growth is extremely constrained. Rents are
significantly below market rates and set at no more than 25 per cent of the
tenant’s income. Calculations of tenant income also exclude or limit the
inclusion of some Commonwealth payments and recent pension increases. This
assists people on very low incomes to meet other costs such as food and
transport. Greater prioritisation of public housing to those of highest need
has increased the percentage of tenants without employment and receiving
government benefits, and has consequently decreased rental income.

Increased operating costs are exacerbating this
revenue reduction, resulting in a ballooning deficit. While rent and other
property income has increased by 6.8 per cent (in nominal terms by $24.1
million between 2007 and 2012), operating costs have increased by 26.9 per cent
(in nominal terms by $91.9 million) over the same period. Figure 2A shows that
across the portfolio, the gap between rental income and operating costs has
increased from 30 per cent in 2002, to 42 per cent in 2011.

Figure
2A
Growing gap between public housing rental income and expenses 2002–11

A 2011 review, commissioned by the Minister
for Housing, forecasts the deficit to more than double from $56.4 million in
2011, to $115.1 million in 2015. The review states that the division is ‘facing
a cash crisis with all cash reserves expected to be exhausted during the
2012–13 financial year based on current budget estimates’.

The division cannot pinpoint when the
operational model for public housing became unsustainable. This is because the
division has funded deficits by deferring acquisitions and maintenance and
using cash received in advance for long-term programs, along with unspent cash
from capital programs. Figure 2B lists the short‑term strategies the
division has used to address its financial position.

Generally, these funds would be reinvested back into
capital projects. Instead they are used to subsidise programs and rental
operations and this impacts long-term ability to supply accommodation.

Deferring renewal maintenance and physical improvement
expenditure

Short-term reduction in cash outflows

Reduces the useful life of
existing stock and increases the number of un-tenantable properties. This
effects the future supply of accommodation and worsens the maintenance
backlog.

Source:
Victorian Auditor-General’s Office.

In April 2005, as a part of Budget processes, the
Housing Resource Allocation Review was established to review housing
assistance. In 2010, this was renamed as the Housing Review Board, and
comprised senior officials within DPC, DTF, the Department of Planning and
Community Development and DHS.

In its April 2006 report, the board found that the
division’s financial position was unsustainable over the forward estimates
period, given current policy and revenue settings. The board determined no
immediate risk to financial operations as the public housing program was able
to be funded using short‑term measures. In its 2007 report, the board
noted that the division’s underlying financial position has been deteriorating
since 1998–99.

An additional 2007 review commissioned by DTF to look
at options for managing public housing stock also highlighted the declining
rental income, ageing and diminishing property portfolio and deteriorating
financial position of the division. It made a range of recommendations for
asset management and investment alternatives.

Despite these reviews, neither the board, the
division, nor the government, developed or acted upon any long-term strategies
to address the deteriorating financial position. The division is unable to
demonstrate any evidence that it pursued alternative operating models to put
public housing back on a sustainable footing. DTF, in a March 2012 report to
the steering committee for a DHS-wide funding review, acknowledge that the work
of the Housing Review Board has not ‘substantively addressed the division’s
financial sustainability’.

Financial management and
transparency

The division has not reviewed, either recently or over
time, the efficiency of its service delivery. This fundamentally compromises
the division’s capacity to understand and improve operational efficiency. This
is despite previous DTF recommendations to do this, and a $28.6 million
increase in divisional administration costs between 2007 and 2011.

The composition of the division’s remaining cash
balances and forecast cash flows is also unclear. The division needs better
delineation between committed funding, contracted expenditure and cash
reserves. For example, although all cash reserves are expected to be exhausted
during 2012–13, they could be exhausted earlier due to funding
commitments under existing programs. The division does not know exactly when the
cash reserves will be exhausted under the current operational model. External
consultants, commissioned by the division, are currently investigating
this.

Accrued maintenance costs

Due to the continuing operating deficit, there is an
increasing, unfunded maintenance liability, which has led to deterioration of
the asset base. A 2011 Budget submission by the division, states that
substantial maintenance is ‘required to avoid the closure of approximately 10
000 properties’ over the next four years, approximately 14 per cent of the
portfolio. The amount requested for portfolio maintenance over a three-year
period is $600 million, which does not include anticipated maintenance costs
past the
three-year period.

Further, the division acknowledges that the full extent
of the maintenance liability is unknown because:

the division has not accounted for, or recognised, the extent to
which public housing has been under-maintained as a liability

property condition data is poor, preventing a more accurate
forecast of accrued maintenance across the portfolio.

Excepting the recent Budget submission, the
division has not vigorously pursued options to reduce, or remove, this asset
liability.

2.4 Strategic direction for public housing

2.4.1 Previous housing policies

Over the past decade, policy guiding the division has
focused on the growth of community housing through non-profit housing
associations, new builds funded through time-limited Commonwealth funds, and
specific redevelopments. The introduction, in 1999, of the prioritised waiting
list that, while targeting housing to need, has greatly affected public housing
by decreasing its revenue. Figure 2C summarises previous policies.

Figure 2C
Housing policies 2000–2010

Year

Policy

Description

2003

Strategy for growth in housing for low income Victorians

This policy aimed to increase the supply of affordable
housing through regulated housing associations. This represented a shift away
from the traditional model of social housing provision of government being
the primary supplier.

2010

Victorian Integrated Housing Strategy

Under development since 2004,
this strategy proposed to increase community housing supply through housing
associations, deliver 800 new public housing units and provide better public
housing through estate redevelopments.

Source:
Victorian Auditor-General’s Office.

The 2010 policy does not articulate the intended
target group for public housing or outcomes for this group. Further, while
committing to growing housing stock, neither policy addressed the underlying
financial non-viability of the public housing portfolio.

2.4.2 Divisional planning

The division has not articulated long-term
objectives for public housing. In the absence of any decisive direction, as
shown in Figure 2B, the division has used short-term measures to meet policy commitments
to increase housing supply. This has only exacerbated the increasing
operational deficit. Over the past ten years, the division has also not
undertaken any long-term planning to direct the management of public housing.
Such planning, considering at least a 10-year period, is particularly important
given:

the fixed nature of the asset base

the high cost of structural alterations

the relatively long life span of housing stock, with industry
benchmarks at 40years or more for residential housing stock

long lead times for redevelopments and new builds

external pressures, such as decreasing housing affordability

constrained revenue growth from rental income.

This lack of long-term planning hinders
decision-making and effective asset management. For example, regional offices
visited during the audit, report that their inability to articulate a long-term
plan makes prioritising effort and working effectively with stakeholders, such
as local councils and tenants, difficult.

For the first time, in 2011–12, the
division developed a business plan for its Property and Portfolio Branch. The
plan links to overarching DHS and government plans, and sets clear objectives
and supporting strategies. The division’s next asset strategy should then
provide the practical road map to implement this plan.

2.4.3 The new housing framework

The government is currently developing a housing
framework. It aims to provide long‑term future direction for public
housing, including intended outcomes and to address current and future housing challenges.
To inform the framework, the division plans to release public discussion papers
on the challenges facing public housing by April 2012. At March 2012, the
division had commenced, but not yet completed work to model the financial
impact of policy options being considered or to articulate ways the framework
might address the unsustainable operating model. This work is necessary to set
realistic parameters for public discussions.

2.4.4 Extracting greater value from the portfolio

Despite long-standing knowledge of public
housing’s unsustainable operating model, the division has not adequately
explored alternative options to fund public housing. The division has not
questioned the role it should play in delivering public housing, compared or
benchmarked against other providers, modelled alternative funding approaches,
or evaluated outcomes where the division has innovated.

The division’s role compared to
other providers

The division’s traditional role is to
finance, own and operate the majority of its assets. While this is not
inappropriate, the division has not evaluated whether it performs each element
efficiently and effectively, or whether benefit can be gained by taking a more
flexible approach and contracting out some of these functions. This is despite
the 2007 DTF review that recommended a range of alternate approaches the
division should explore.

For example, the Defence Housing
Association, which provides housing services to defence force personnel,
operates with no ongoing grants through a different model—owning and
maintaining some properties while constructing, selling and then leasing back
others in its portfolio. Although there are clear differences in tenant profile
and funding, the Defence Housing Association model shows that different operating
models can successfully manage a large housing portfolio. There are other
property providers, such as community housing associations and other state
housing authorities, against which the division can benchmark its efficiency in
tendering and construction, asset maintenance and tenancy management. The
division needs to make sure that it meets its service delivery obligations in
the most cost‑effective manner.

Mixed redevelopments

The division has trialled alternatives for funding
capital works, such as attracting private investment through the mixed
redevelopment of existing public housing stock. The division has done this in
Kensington and Carlton, with Kensington almost complete. Despite the Kensington
redevelopment beginning in 1992, the division has not evaluated the
effectiveness of this option or how it might, if more broadly utilised,
influence the financial viability of public housing.

Recommendations

The Department of Human Services should:

develop and apply options to
overcome the unsustainable operating model

3. Public housing asset management

At a glance

Background

Effective asset management requires long-term
planning linked to strategic objectives and whole‑of‑life cycle
asset management. Decisions should be based on comprehensive, reliable
evidence and, in the case of public housing, should meet community needs.

Conclusion

The Housing and Community Building Division’s asset
management approach does not support the legislative objective of providing
‘well-maintained public housing’. There is no current asset management
strategy for public housing and past strategies did not clearly link to
objectives, properly consider the asset life cycle, or support the division
to meet public housing need. The evidence base used to inform decision‑making
is incomplete and out-dated. A $17.8 billion property portfolio,
housing 127 357 Victorians, requires far more informed, cohesive and
comprehensive asset management.

Findings

Asset management strategies have lacked necessary detail, and
the division has not monitored or evaluated performance against asset
strategies.

The division does not apply a strategic approach across the
life of the asset base.

Investment decision criteria are unclear and not understood by
regional offices.

Property condition data are inaccurate and incomplete.

There is a mismatch between housing stock and tenant need.

The
division can benefit from greater input from regional offices and tenants.

3.1 Introduction

Effective asset management is vital to the success
of the public housing portfolio. It should cost-effectively guide service
delivery over the life of the asset base. Planning for, and managing, a large
asset portfolio requires:

a strong evidence base to inform decisions and forecast service
need

comprehensive asset management strategies that consider the asset
life cycle

performance
measures and monitoring to track progress and identify opportunities for
improvement.

3.2 Conclusion

Public housing is an essential part of meeting the
legislative objective that ‘every person in Victoria has adequate and
appropriate housing at a price within his or her means’. A $17.8 billion
property portfolio, that houses 127 357 Victorians, warrants
rigorous asset management of the highest standard. The Housing and Community
Building Division (the division), of the Department of Human Services (DHS),
has much to improve in its management of this valuable asset base.

The division is not following standard asset
management principles. Asset strategies are not aligned to overarching plans
and objectives, do not articulate and link actions to desired service outcomes,
and are not sufficiently evidence-based. The division does not have a current
asset management strategy and past strategies have not adequately accounted for
asset life cycles or considered ways to achieve greatest value from the
portfolio. The division does not compare current stock to its desired portfolio
to guide future direction, and does not assess its performance. These
significant gaps expose a serious deficit in asset management skills within
DHS.

Decisions made in the management of public housing
assets affect the lives of tenants, and the ability to meet future public
housing need. Such decisions, therefore, require a strong evidence base.
However, the division’s evidence base for asset
decision-making is inadequate. Property condition data is unreliable, and the
division does not adequately forecast service levels in the longer term or
effectively obtain input from important stakeholders such as its regional
offices and tenants. Better information and performance monitoring may have
helped the division identify problems such as the significant maintenance
liability and the current mismatch between housing types and tenant needs
earlier.

3.3 Asset management principles

Based on Department of Treasury and Finance (DTF)
and publicly available better practice guidance on asset management, a
comprehensive asset management strategy should:

follow an integrated approach—align asset management
requirements and service outcomes to overarching plans and objectives

focus on service delivery—all planning, decisions
and reporting should focus on the type and quality of services the community
needs

make
evidence-based asset decisions—by relying on rigorous information
about the costs, benefits and risks of alternatives across the asset life
cycle.

A comprehensive asset management strategy is
then supported by:

an acquisition plan that defines the type and timing of
asset requirements and provisioning options, including financing and cash
flows, and considers property cycles and market fluctuations

a maintenance plan that details expected life cycle costs
and requirements, regardless of whether they will be met, to enable a better
understanding of accrued maintenance liability

an operations plan that sets out operating policies and the
resources required to manage the asset, including a breakdown of administrative
costs by business unit

a vacancy management plan that outlines a strategy to
measure and minimise property vacancies

a
disposal and risk management plan.

A comprehensive asset management strategy puts these
principles into practice by directing activity and resources in a coherent and
justifiable way.

3.4 Public housing asset management

Asset management strategies for public housing should
have clear objectives, align with overarching DHS strategies, carefully
consider options, and plan activities to achieve optimal service outcomes.

Purpose and direction

The division developed consecutive four-year asset
management strategies. One covered the period 2003–04 to 2006–07,
and the second from 2007–08 to 2010–11. There was no finalised
asset management strategy prior to 2003, and the division is yet to develop a
strategy for 2011–12 onwards.

No strategy linked clearly with the DHS asset strategy
or detailed what success would look like for the asset portfolio. The
strategies do not state desired service outcomes and objectives, meaning the
purpose of the asset strategies, and direction for the portfolio is
unclear.

Options and stock analysis

Neither of the asset management strategies
compares existing stock, broken down by asset type and location, to forecast
need over the forward period. The division uses information on tenant profile,
location preferences, and housing supply, to inform asset decisions as they
arise. However, the division does not apply this information or broader factors
like demographic trends, amenity profile, or information on the ability to buy
back in a location once an asset is disposed of, to forecast need. The
division, therefore, cannot readily identify its desired stock mix and has no
‘gap analysis’ to inform future asset decisions.

The division is not using its asset
management strategies to identify and articulate an evidence-based approach for
where and how it will focus its efforts to maximise benefit. The past
strategies do not contain assessments of options to extract greater value from
the portfolio. Assets are not categorised by redevelopment potential or other
strategic benefits, and neither strategy identifies, or analyses, possible
alternative options for funding capital and operating costs. A comprehensive asset
management strategy considers more than just a business-as-usual approach and
details options for achieving the portfolio objectives, including evaluation of
service outcomes, costs, benefits and risks for each option.

Life cycle approach

The two asset management strategies do not apply a
systematic and comprehensive life cycle approach across the housing portfolio.
DTF’s 1994 Asset Management Series establishes the requirement to prepare
five-year forward asset strategies covering acquisition, maintenance, upgrades
and disposal, together with capital and operating costs. The 2003 asset
management strategy does not address these phases of the asset life cycle or
detail capital and operating costs across the portfolio. The 2007 asset
management strategy has sections on most of these phases, but has no
information on the maintenance program or operating costs, and details only one
year of the acquisition program.

The division’s asset management strategies do not
detail expected life cycle costs or requirements such as cyclical upgrades of
bathrooms and kitchens. It is not possible to determine from the strategies:

the useful life of an asset, or what the division expects this to
be

projected time lines and costs of planned upgrades for each asset
type

the
costs and types of maintenance, whether for planned, responsive or preventive
maintenance.

This lack of detail prevents the division
from understanding and meeting the needs of the portfolio across its life
cycle.

Acquisition

Neither asset strategy has an assessment of the
various methods of acquisition, such as the costs and benefits of spot
purchase, leasing, construction, redevelopment, joint ventures or land swaps
with other government agencies. There is also no explanation of cash flow
management.

The method of acquiring properties is important as it
determines the financing model and delivery time. For example, new
constructions and redevelopments require substantial lead times compared with
leasing or spot purchases, and cash flows for each acquisition method are
different. Acquisition should also consider property cycles and market
fluctuations, and neither strategy accounts for this.

Asset intent and disposal

The strategies do not give a clear assessment of
portfolio condition, by classifying or prioritising properties across the
public housing portfolio to support strategic decision‑making. Good asset
management identifies and groups properties with ideal attributes, such as
proximity to public transport, which the division could then manage differently
to lower quality stock of less strategic importance to the portfolio.

The division does have a property rating system, the
Housing Assistance Lease Plan (HALP). However, divisional asset management
strategies do not apply HALP rating information at a system level to direct
asset planning in the public housing portfolio.

Vacancy management

Management of vacant properties, even for a few days
or a week, is prudent as this ‘down’ time adds up across a large portfolio such
as public housing. While the division has effective vacancy management
practices and low vacancy rates, these are not reflected in the asset
management strategies or plans to measure and minimise property vacancy.
Further, as an efficiency measure, management of vacancies across the portfolio
could be linked to, and scheduled with, planned maintenance, revaluations and
property condition audits whenever possible.

Evaluation and performance
monitoring

The division does not assess or monitor its asset
management strategies. Other than reference to tenant satisfaction surveys, the
division does not include performance indicators within its asset management
strategies. The 2003 asset management strategy acknowledges that ‘the model
does not currently provide assessment of the range of factors appropriate to
major improvement proposals or long-term maintenance regimes’. It goes on to
state that ‘the financial model should be reviewed and modified to provide
total asset management financial assessments’. The 2007 strategy does not refer
to the suggested review and incorporates no performance measures, financial or
otherwise.

It is therefore unclear:

whether planned decisions were implemented

whether available resources were used effectively or efficiently

how the portfolio is performing financially, such as the number
of tenants housed as a proportion of total asset value

whether the division is achieving good return on investment,
given the timing and method of acquisition

if
there are opportunities for improvement.

The performance of a $17.8 billion property
portfolio deserves regular and careful monitoring. This lack of evaluation is
particularly concerning given the financial pressures within the portfolio, the
long lead times needed to create change and the importance of being able to account
for the performance of this crucial public service.

3.5 Evidence-based decision-making

Good public housing asset management requires a
reliable evidence base using accurate, up-to-date information on asset
condition and performance as well as an understanding of external housing
pressures and demand.

Investment decision-making

In 2011, the division established the Investment
Review Committee (IRC) to assess, prioritise, and standardise a process for
proposed major redevelopments and new builds across public housing. Before
then, the division did not have a clear investment framework to prioritise its
constrained discretionary funding for capital works.

An external consultant chairs the IRC, and the
committee consists of senior divisional staff. The IRC has developed a clear,
stepped process to appraise project development activity on a case-by-case
basis, and make recommendations to the Director of Housing. This is an
improvement on past practice. However, the IRC has not documented the criteria
on which it bases its recommendations and staff at the four audited regional
offices do not understand the decision-making process. Regional staff report
that this makes it difficult to plan at the regional level and assist head
office to identify redevelopment opportunities. Specifically, it is unclear how
the IRC:

assesses each proposal’s value-for-money, and what criteria are
used

established, and uses non-financial criteria and weighting, and
what criteria are used

established,
and uses cost and profit benchmarks.

Property condition data

The effective management of public housing assets
requires accurate property condition data to target funding appropriately. This
data should capture both asset condition and maintenance costs to inform the
asset management strategy and correctly prioritise works across the portfolio.

Regional field officers should undertake property
condition audits (PCAs) every three years to provide an estimate of property
condition. The division uses PCA data to determine annual maintenance and
capital works. In a 2011 Budget submission, the division states that ‘there is
insufficient operational funding to maintain accurate data on the entire
portfolio at any point in time’. Reviews, both internal and commissioned,
undertaken since 2007, have identified a number of issues with the PCA system,
resulting in inaccurate and unreliable data. For example, if maintenance costs
for a property are set at $20 000, and only $12 000 of the repairs are
completed, the maintenance costs recorded against the property are reset at $0,
despite outstanding works remaining. Other problems include that:

in 2011, 14 321 dwellings (24.9 per cent) had not been assessed
for over three years, with 2 400 of these not inspected for over five years,
despite divisional policy to assess all properties at least three-yearly

field
officers have inconsistent skills, experience and methods.

A 2011 PCA pilot audit, aimed at better
understanding the integrity of current PCA data, found further limitations:

data focuses on the three years following the inspections, with
work after that period often uncosted

inaccurate
costing of work within the three-year period, with maintenance costs for over
half the audited properties varying by more than 100 per cent from the external
expert estimate.

The division also
estimates that, due to limitations within the PCA system, maintenance costs of
$298 million across the portfolio are, on average, understated by 138 per cent
for each property.

Asset management service
improvement strategy

The division has identified the need to improve its
property condition data and, in 2011, developed a service improvement strategy
for asset management. The strategy focuses on improving property condition data
through a comprehensive audit. This will assist the division to:

determine the priority, scope and funding required to
address the current maintenance backlog and short-term future capital works
required

In addition, the division aims to use the updated
property condition data as one input of many, including locational attributes
and demand information, to assign each property an ‘asset intent’ to classify
properties as either ‘hold and improve’, ‘redevelop’ or ‘dispose’. The division
will then use this information to inform future asset strategies.

The property condition update will improve
decision-making and allow for better asset management and forward planning
across the portfolio.

3.5.1 Research and forecasting

Research and analysis into trends influencing public
housing demand and supply, and affordable housing in general, is necessary to
inform long-term planning. This is particularly important for an asset base
that requires long lead times to change due to its fixed locations, high cost
to modify, and long life span, with residential properties estimated to have at
least a 40-year life. Construction and redevelopment also takes considerable
time, which in turn limits the speed of response to changing service need.
Figure 3A outlines key factors affecting public housing supply and demand to
demonstrate the kinds of information needed to forecast public housing demand.

Figure 3A
Supply and demand pressures on public housing

Key information areas

Location and property type: Locational amenity and
attributes, and the structure and size of dwellings in an area, influence the
affordability of the private rental market. Shortages of a particular type of
dwelling can place pressure on existing public housing stock.

Tenure: Tenure is an important indicator of the
availability or proportion of public housing as well as the balance between
rental housing stock, stock that is owned and stock that is being purchased
within a particular area or region.

Land supply: Shortages of land for new residential
development can significantly affect the availability and pricing of
dwellings in an area, increasing pressure on public housing.

Demographic data: The age of the population influences
household formation and, with population size, housing need. There are
important age ‘cohort’ effects in relation to tenure preference and housing
demand as well as vulnerability and the likelihood of public housing need.

Household formation: Increasing household formation
rates means that there will be a steady demand for dwellings (as the number
of households grows) even in areas where there will be no overall population
growth.

Housing stress: Housing
stress refers to the impact of high housing costs on low and moderate income
households. Housing stress refers to ‘households in the bottom
40 per cent of income distribution paying more than 30 per cent of
their gross household income on housing costs’. Increasing housing stress
places pressure on public housing.

Source: Victorian Auditor-General’s Office.

Matching housing stock to tenant
need

The division combines public housing waiting list
data, by local government area, with data on affordable housing to determine
localised demand. An indicator of supply is determined by combining public
housing allocations with affordable private rentals in the area. The resulting
Composite Needs Distribution gives a relative need for public housing by
location and bedroom number across the state, and assists in asset planning
over the medium term. It cannot, by itself, be used to model future public
housing stock requirements over the longer term. Partly for this reason, a
significant mismatch now exists between public housing stock and the needs of
current and future tenants.

The 2010 Victorian Parliamentary Inquiry into the
adequacy and future directions of public housing in Victoria found that
‘while the need for more stock suitable for single person households has long
been acknowledged, this has not been supported by well‑developed
modelling which provides an indication of how many properties are required to
meet the needs of this tenant group’.

The tenant profile of public housing has changed
substantially over time. Large estates, built in the 1960s, were intended for
working families on low to moderate incomes as a transitional measure before
moving into private housing. Public housing now serves an increasing proportion
of elderly, single and economically and socially disadvantaged tenants. The
need for one-bedroom dwellings has increased as the need for larger dwellings
has decreased. Bigger properties have larger operating expenses and, given
modern density allowances, underutilised sites represent a missed opportunity.

Figure 3B shows the mismatch between public housing
stock, and demand as reflected by the public housing waiting list. As shown, it
would require almost 100 per cent turnover of households in
one-bedroom properties to meet waiting list demand, compared to only 25 per
cent for three-bedroom properties.

Figure
3B
Public housing stock and waiting lists by bedroom size as at 30 June 2011

This information assists the division to understand
factors that create public housing need, and therefore assists in identifying
the target group for public housing and developing ways to support people to
move into, or stay in private housing arrangements. The 2011 overarching DHS
asset management strategy states that, ‘...long-term program planning....should
reflect the changing profile of people in housing need’. Additional analysis
will have to build on this initial work to forecast service demand into the
future for those who do need public housing assistance.

3.5.2 Stakeholder input

Regional input

Regional input into asset planning is not consistently
captured, meaning local knowledge is not always leveraged. Asset planning is
centralised, with the division’s central office developing annual work plans
and budgets for the regional offices. Regions then review these work plans and
can suggest changes. The four audited regions, covering metropolitan and rural
areas, report differing extents to which they can influence their respective
work plans, with one region not actively participating in the planning process
at all. Each region varies in regards to whether they have a dedicated position
for asset management.

The division’s central office recognises the need to
improve interaction with, and consistency in, asset management within regions
to better capture local knowledge and increase regional participation in asset
management.

Tenant participation

Under the Housing Act 1983, government is
required to:

seek the participation of tenants and other community groups in
the management of public housing

promote
consultation on major policy issues with all persons and groups of persons
involved in housing.

The division’s tenant participation framework aims
to increase opportunities for public tenants to contribute to decisions
affecting them. Activities include:

funding the Victorian Public Tenants Association, the peak body for
public tenants and tenant groups

funding volunteer public tenants groups under the Tenants Group
Program

tenant satisfaction surveys

statewide and regional tenant forums

local
housing office meetings.

Despite these initiatives, our consultation
with public housing tenants identified that tenants do not feel genuinely
engaged or consulted on public housing management or policy issues. Rather,
they perceive current participation as ‘tokenistic’. In three regions, regional
tenant forums are not operating. Public housing tenants report that while there
are many avenues for input, they are not coordinated to provide a unified
tenant view. Tenants also feel that the division does not provide sufficient,
timely information, particularly concerning the mix of community, private and
public housing that is occurring on redeveloped estates.

Appendix A. Audit Act 1994 section 16—submissions and comments

In accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Human
Services with a request for submissions or comments.

The submission and comments provided are
not subject to audit nor the evidentiary standards required to reach an audit
conclusion. Responsibility for the accuracy, fairness and balance of those
comments rests solely with the agency head.

As referenced at 2.3.1 of this report, VAGO is aware
of the review of the Housing and Community Building Division’s cash flows by
external consultants. VAGO is also aware of the current base review of the
broader Department of Human Services by the Department of Treasury and Finance
(DTF).

DTF note, in a March 2012
report to the Steering Committee for the base review, that they have made
recommendations to the division to review and improve efficiencies ‘for several
years’ and that the need to do this is now ‘urgent’. The intent of the
recommendation is that a specific assessment of the efficiency and role of the
Housing and Community Building Division in delivering public housing is needed,
given the increase in administration costs and clear gaps in asset management
practice. It is not evident that either the external consultant review, or the
broader DTF base review, will focus on this.